Most attorneys and law practices generally understand which clients are no longer clients and which matters should be closed. Although closing files is not complicated, it typically only happens if there is a concentrated effort to close outstanding matters before a deadline. Collecting outstanding fees at year-end can be an arduous task, but it is a logical time to identify the client relationships that are over and the matters that can be closed. Indeed, the endless year-end spreadsheets of all open client matters with outstanding receivables often highlight the files that should be closed.
While the end of each year provides a logical deadline, attorneys should also consider reviewing files regularly throughout the year, as closing files that need to be closed is one of the most important tasks for effective claim prevention. By considering these issues mid-year, attorneys can help avoid headaches at year-end.
Different ethical rules apply
The formal termination of an attorney-client relationship through a file closing can be an important aspect of risk management for many reasons. For one thing, it has significant positive implications for the ethical, legal, and professional obligations of an attorney and the law practice. Once the attorney-client relationship ends, clients move from being existing clients of the attorney and the firm to being former clients. This is a significant distinction for conflict of interest purposes, as the ethics rules governing existing clients are different from those governing former clients.
Generally, if a new matter involves an existing client, the conflict of interest rules may require the attorney to obtain informed written consent of each client before accepting representation of more than one client in a matter in which the interests of the clients potentially or actually conflict. If the client interests actually conflict, the attorney may have to decline the representation to avoid violating the duty of loyalty.
On the other hand, the conflict rules for former clients are less onerous. The critical test for a new representation involving a former client—as opposed to an existing client—is whether the new matter is substantially related to the representation of the former client. If not, nothing further usually needs to be done.
Even if the new representation is substantially related to the representation of a former client, the attorney or firm can often still accept the new matter with the written informed consent of the former client. Basically, there is real "ethics" value for an attorney to move inactive clients, or clients for whom the attorney no longer works, from the existing client category to the former client category.
The transition from existing client to former client can also affect liability issues. In recent years, there has been significant appellate activity regarding when the statute of limitation begins to run for legal malpractice claims, particularly with regard to the trigger date for the statute of limitation. As a result, claim avoidance through risk management has become much more complicated. Often, these risk management issues are further complicated by the existence of an ongoing attorney-client relationship—or a nonterminated relationship—even though the representation itself has ended.
In legal malpractice lawsuits, clients often argue that an ongoing confidential relationship with their attorney means the applicable statute of limitation is tolled. Sometimes, clients could simply rely on the existence of an open client-matter file and argue that this alone reflects that they remain clients of the attorney or the law firm.
One way to address this issue is to close the files when the representation ends. By closing the file, the attorney is likely able to argue that any duty to the client has terminated or been foreclosed. This simple step permits attorneys and their law firms to formally transition an existing client to a former client, as well as support a position on whether the statute of limitation has begun to run.
Generally, effective file closings involve three parts: a file closing letter; an accounting of all funds received; and an administrative closing of the matter. The combination of all three parts provides the most protection, although each firm can review to identify the best course for its practice.
Sending the letter
The file closing letter generally includes: an accounting of all funds received; confirmation that the representation has ended (typically as of the date of the letter although it can vary); notice that the attorney or firm will no longer be providing any legal services absent a further retention; and a description of the attorney or firm's document retention policies.
Depending on the document retention policies of the attorney or law firm, the letter may attach originals or the file itself, or offer to make the files available for pick-up. It is always a good idea for attorneys to retain a copy of the file. If a claim is ever asserted by the client, the attorney's file is one of the most important tools for defending. Even if the practice is to return the file to the client, the attorney should retain a copy.
Many attorneys book-end the essential parts of a file closing letter with sentences consisting of "thank you for hiring us," and "please do not hesitate to call on us again." Obviously, the content of the file closing letter will vary depending on the reasons for the termination of the attorney-client relationship.
If the attorney is closing the file for nonpayment of fees, or the client disappears, then the letter might be much more formal and direct. If the attorney is closing the file because the representation has been successfully concluded, the file closing letter might include a marketing component inviting future representations or even referencing other open, discrete matters for the client.
Regardless of the reason, when the representation ends, the attorney or law firm should consider sending a file closing letter confirming the end of the attorney-client relationship and, as a result, any ongoing duty to the client for that particular matter. This is true even for clients for whom the attorney or law practice does other work; a closing letter for a particular closed matter even if other matters are ongoing is important for risk management purposes. Indeed, effective audits of law firms randomly check closed files to see if file closing letters are in the files.
Complete an accounting
The accounting should be accurate and complete. Open issues surrounding client funds can come up at the most inopportune time. A final accounting may include an accounting of all funds received, the application of funds toward outstanding expenses and fees consistent with the fee agreement or engagement letter, and the return of any funds to which the client may be entitled.
Taking administrative steps
Attorneys and law firms continue to be surprised when a new client comes in and the computer system shows an old potentially conflicting representation is still an open matter. The best way to avoid those unpleasant surprises is to close the old files now and to ensure that the file is considered "closed" administratively. For most firms, this involves simply checking a box on their systems to indicate that a matter is closed.
By closing files, attorneys and law firms can take advantage of one of the most effective claim prevention techniques. There is no better time than the present.